Navigating Retirement: Dynamic Safe Withdrawal Rates In Action

One of my ongoing challenges as a writer is explaining financial concepts in an easy-to-understand manner. With a background in business school and 13 years in banking, financial concepts come naturally to me.

Despite writing over 2,500 personal finance articles since 2009 on Financial Samurai, however, some concepts still get misunderstood or provoke readers into a fit of rage. One such concept is my Dynamic Safe Withdrawal Rate, introduced in my post, “The Proper Safe Withdrawal Rate Is Not Always 4%,” in 2020. Review some of the post’s comments to see for yourself.

Instead of retirees adhering strictly to the “4% Rule,” popularized in the 1990s as a safe withdrawal rate, I advocate for a dynamic approach. This means adjusting withdrawal strategies as circumstances change.

By staying flexible, you increase your chances of staying retired.

A Quick Explanation Of My Dynamic Safe Withdrawal Rate

My Dynamic Safe Withdrawal Rate is calculated as the 10-year Treasury bond yield multiplied by 80%. This percentage is based on the idea that the suggested 4% withdrawal rate from the 1990s roughly equaled 80% of the average 10-year bond yield, which was around 5% at the time.

The concept was simple: if you could withdraw at a 4% rate while earning a risk-free 5%, your funds would never deplete. Therefore, let's take this logic to the present.

Using the 10-year Treasury bond yield as a variable for withdrawal rates is crucial because it continually fluctuates. This yield stands as a pivotal economic indicator that every investor should monitor. It serves as the benchmark for risk-free returns, influencing the pricing of risk assets. Additionally, the yield curve reflects assumptions about inflation, economic growth, and monetary policy.

However, this is where confusion sometimes arises.

Yield curve inversion 2024 - Understanding dynamic safe withdrawal rates for a better retirement

Retirees Have Diversified Portfolios

Some readers mistakenly believe I advocate for a portfolio consisting entirely of 10-year Treasury bonds in retirement, which is incorrect. While living solely off the interest from Treasury bonds could guarantee financial stability, most retirees maintain diversified portfolios. Their investments span across real estate, stocks, bonds, venture capital, alternative assets, and cash.

I am meeting retiree investment portfolios where they are.

Investors strive to find the optimal asset allocation that balances maximizing returns with minimizing risk, considering their financial goals and risk tolerance. Regardless of the allocation, every investment should be assessed against the 10-year bond yield, or the risk-free rate of return. If an investment's expected return doesn't exceed the risk-free rate, a logical investor would reconsider its viability.

Furthermore, investors understand that investments rarely achieve their historical averages annually. For instance, stock returns can significantly deviate from their long-term average of 10% since 1926.

As retirees seek predictability and stability, they often opt for portfolios with less volatility. Financial loss creates stress. And given stress kills, your goal as a retiree should be to remove as much stress from your life as possible.

Financial Samurai Dynamic Safe Withdrawal Rates In Retirement

How Following My Dynamic Safe Withdrawal Rate Turned Out

I understand that some of you may still oppose my Dynamic Safe Withdrawal Rate. It's natural to feel uneasy about changing the long-celebrated 4% Rule to adapt to today's different world.

Change can be challenging, especially as we grow older. Heck, there are still people who clean their bums with dry toilet paper when bidets are so much better! But embracing change is essential if we want to maximize our wealth and achieve greater financial peace in retirement.

For context, I'm speaking from experience as someone who hasn't had a day job since 2012. I also don't benefit from a working spouse providing additional income or subsidized health insurance since my wife left the traditional workforce in 2015.

I'm not just theorizing about retirement; I'm living it in the best way that I can. And from my firsthand experience, you won't truly understand your risk tolerance in retirement until you and your partner, if applicable, completely rely on your investments. When downturns happen, the worry is amplified due to a lack of active income cushioning.

To better illustrate my Dynamic Safe Withdrawal Rate (DSWR), let me provide a case study of its application since 2020 when COVID hit. This example will offer insights into how this approach has performed in real-world conditions.

Dynamic Safe Withdrawal Rate In 2020

In March 2020, the COVID lockdowns began, sparking widespread market panic. By March 30, 2020, the 10-year bond yield had dropped to approximately 0.59% as investors flocked to the safety of Treasury bonds.

With the 10-year bond yield at 0.59%, your Dynamic Safe Withdrawal Rate would decrease to 0.47%. To simplify, I rounded it up to 0.5%, a figure that triggered some strong reactions from readers.

Typical angry feedback goes something like this:What?! A 0.5% safe withdrawal rate means I need to save 200 times my annual expenses to retire! You're just spreading fear and misinformation!

Unfortunately, conflicts often arise when one side fails to understand the perspective of the other. The concept of a safe withdrawal rate primarily concerns individuals who are already retired. The goal is to provide retirees with confidence that their savings will sustain them throughout their retirement, especially when they rely heavily on their investments for financial support.

The fear of running out of money looms larger for retirees than for those with a steady income stream. And this fear of running out of money for retirees is precisely why some retirees continue to generate supplemental retirement income.

Discovering Your Temporary Net Worth Target

Indeed, for those still in the workforce, you can invert 0.5% to derive a target net worth for retirement, which would be 200 times your annual expenses. However, it's crucial to recognize that my Dynamic Safe Withdrawal Rate is constantly evolving with market fluctuations.

At that moment in time, a tremendous net worth was needed relative to your expenses because the world felt like it was falling apart.

Consequently, if you opt to utilize the inverse formula, be prepared for your target net worth to fluctuate accordingly over time.

What I Ended Up Doing During COVID

Experiencing a sense of déjà vu reminiscent of when I launched Financial Samurai in July 2009, amidst the depths of the global financial crisis, I felt compelled to adjust my withdrawal rate. It seemed only prudent to tighten spending and bolster savings, a natural outcome of reducing one's safe withdrawal rate. With a newborn daughter, a three-year-old son, and a stay-at-home spouse to support, this decision carried significant weight.

Then, on March 18, 2020, I penned a post titled “How To Predict The Stock Market Bottom Like Nostradamus.” In that article, which I hope you've all had the chance to read, I posited that 2,400 in the S&P 500 represented the worst-case scenario, advocating for buying opportunities as a result. Additionally, I forecasted a V-shaped recovery in the latter half of 2020.

In order to adhere to my own rationale and summon the courage to invest in stocks amid the market downturn, I found it necessary to adopt a lower safe withdrawal rate. This adjustment not only liberated funds for investment but also provided a substantial cash buffer to weather any further declines in my newly acquired stock holdings.

10-year bond yield - A key component to calculate the Dynamic Safe Withdrawal Rate for retirement

An Example Of Investing Thanks To A Lower DSWR

If you're questioning the logic, consider a retiree accustomed to spending $10,000 monthly based on a 4% withdrawal rate. The retiree also has $150,000 in cash and short-term Treasury bonds. With the onset of global lockdowns, this retiree slashes expenses to just $1,250, adhering to a 0.5% withdrawal rate and limiting spending to essential needs.

However, drawing from experience navigating market panics and recoveries, this seasoned investor opts to channel the remaining $8,750, previously earmarked for expenses, into the S&P 500. By maintaining a dynamic safe withdrawal rate pegged at 80% of the 10-year bond yield throughout 2020, the retiree continues this strategy, directing unspent funds into the S&P 500.

Over the span of a year, this retiree funnels roughly $100,000 into the S&P 500 by tightening spending. Additionally, leveraging the confidence gained from dynamically adjusting their safe withdrawal rate, the retiree commits an additional $100,000 in cash reserves to the S&P 500, capitalizing on its potential amidst low interest rates.

Dynamic Safe Withdrawal Rate In Action In 2023

Following the stock market's appreciation in 2020 and 2021, retirees who tightened spending and ramped up investments found themselves in a more favorable financial position. As the 10-year bond yield climbed to approximately 1.5% by November 2021, retirees cautiously adjusted their dynamic safe withdrawal rate to 1.2% (1.5% X 80%).

However, 2022 witnessed a 19.6% correction in the S&P 500 amidst aggressive Fed rate hikes, pushing the 10-year Treasury bond yield to 4.85%. Retirees were faced with a dilemma to raise their overall withdrawal rate to 3.88% given inflation was making everything more expensive or maintain conservative spending and continue investing; retirees found themselves at a crossroads.

Retirees who remained faithful to the Dynamic Safe Withdrawal Rate (DSWR) found themselves in a win-win scenario as the S&P 500 rebounded by 26% in 2023, while also getting to spend a greater percentage of their retirement savings.

S&P 500 Performance - a dynamic safe withdrawal rate case study

My Actions in 2023

As a pseudo-retiree who decided to pursue his passion for writing, I have supplemental retirement income from Financial Samurai, my severance negotiation book, and now traditionally published books.

Although being an author doesn't pay much, this supplemental income acts as a shield, allowing me to afford to invest more and take more risks in retirement. Alternatively, I could withdraw funds at a higher percentage to YOLO on things I don't need.

By mid-2023, I felt relieved because we had clawed back most of the stock market losses from 2022. In addition, a house that I wanted to buy in May 2022 was privately being offered at a lower price when the listing agent emailed me in May 2023.

For 3.5 years, I was extremely careful with my spending. Not only did we have a new baby in December 2019, but we also decided to buy a new house in mid-2020 once I realized our old house we bought in 2019 would take much longer to remodel.

A Willingness To Take More Risk

With stocks up and real estate prices down since 2022, I was excited to take on more risk in 2023 by climbing another rung up the property ladder. The 2022 downturn reminded me that there was no point in investing in stocks if you don't occasionally sell to buy something useful.

So in October 2023, I bought my realistic dream home by selling stocks and Treasury bonds. The source of funds was roughly 65% stocks and 35% Treasury bonds. Although I would miss earning a 5%+ annual risk-free return on my Treasuries, I wanted the house more. Besides, there was a chance home prices could catch up with the S&P 500.

How To Think About The Dynamic Safe Withdrawal Rate Today

With the 10-year Treasury bond yield hovering around 4.5%, my Dynamic Safe Withdrawal Rate guides for 3.6%. As a retiree, you need to do a financial checkup to see if the latest DSWR makes sense. Everybody's situation is different.

On the one hand, a high DSWR indicates the economy is robust and inflation remains high. Therefore, spending a greater amount in retirement makes sense. On the other hand, a high DSWR today means the economy may slow down in the future, therefore, caution is prudent.

But here's the thing. If the economy does indeed slow down and inflation does settle down to the Fed's long-term target of 2-2.5%, then the DSWR will also come down. As a result, you may naturally decide to spend less money in retirement. You're logically bracing for leaner times while inflation is no longer hurting your purchasing power as much.

Don't Need To Forecast The DSWR To Alter Spending

You can certainly try to anticipate where the DSWR is going and be even more conservative than what the DSWR suggests. However, the whole point of the DSWR is to help guide your spending as economic conditions change without having to overthink things. If you are too conservative, you will more than likely fail to spend down enough wealth before you die.

So you see, my Dynamic Safe Withdrawal Rate is a guide to help you make more optimal decisions going forward. It is not a rule.

Personally, the latest DSWR indicates I can spend a similar amount of money in 2024 as I could in 2023. However, the issue is, with such low liquidity post my house purchase, I'm on a mission to save as much as possible to feel more financial security.

Final Takeaways Of My Dynamic Safe Withdrawal Rate Guide

As a Financial Samurai reader, my goal is to help you think more critically about issues to make the most optimal decisions possible for building wealth. Keep an open mind when reading financial concepts because there is no 100% right or wrong way of doing things.

The world is becoming more connected, and financial markets are growing more volatile over time. One of the primary goals of my DSWR is to remove EMOTION from your financial decision-making process.

The same principle applies to my Debt And Investment Ratio formula when deciding how much of your cash flow to allocate to paying down debt or investing. It is also a dynamic formula that encourages you to logically pay down more debt as interest rates increase and vice versa.

If you want to feel better in retirement, consider the following:

  1. Find something you enjoy doing that earns supplemental retirement income. This way, you'll have something meaningful to occupy your free time and help protect your finances during difficult times.
  2. Be dynamic in thought and action. Just as you wouldn't continue with the same approach if it's not yielding results, you shouldn't stick to the same spending pattern in retirement regardless of the economic environment.
  3. Recognize that circumstances far above or below trend are usually temporary. Therefore, it's essential to understand where you are in the economic cycle and adjust your strategies accordingly.
  4. Stay humble by acknowledging that we cannot consistently predict the future. Consequently, we must stay vigilant with our finances, diversify, and be prepared to adapt when necessary.
  5. Don't confuse brains with a bull market. Your net worth will likely far surpass any amount you could have reasonably spent when returns are strong.

Reader Questions And Suggestions

If you still vehemently disagree with my Dynamic Safe Withdrawal Rate formula, feel free to express your dissent! Share your reasons for disagreement, and provide examples if possible. If you are retired, how did you alter your withdrawal rate or spending since COVID began?

Plan better for retirement by utilizing Empower's free retirement planning tool. It will help you estimate your future retirement needs and retirement cash flow. Your goal is to get your probability of success rate to 99%. The success rate is another great target to incorporate for retirement success.

Empower's Retirement Planner Free Tool
Empower's Free Retirement Planner

Alternatively, explore the robust financial tools offered by NewRetirement. Designed specifically for retirement planning, NewRetirement has the capability to comprehensively incorporate various aspects of your diversified net worth, including real estate, providing a more comprehensive and accurate financial overview. After your free trial, there is a subscription fee.

19 thoughts on “Navigating Retirement: Dynamic Safe Withdrawal Rates In Action”

  1. J.T. Solomon

    What I am confuse about is the traditional 4% withdrawal rated being the safe rate to ensure you don’t run out of money in that along with not running out of money is the goal to never draw down principal either? With safe CD rates at 4-5% and other income options as well, with only a 4% withdrawal rate, principal will never go away. I love my kids, but not sure my goal is to leave them what I have in principal after working 40 years. Thanks for any thoughts….

  2. Sam,
    One thing I didn’t see you mention is the use of a HELOC. My wife and I are blessed to both have defined benefit retirement income that more than meets our monthly expenses, so we use withdrawals to fund home renovations, new cars and dream international trips. If the market is down, we use funds from our HELOC and pay the balance down aggressively (due to the current interest rates) and draw funds out, dynamically as you suggest, when the market improves.
    I never heard anyone suggest tying withdrawals to the 10-year Treasury rate, but think it is a great tool nonetheless!

  3. I am planning on staying at 45% stocks, 35% bonds (corporate) and 20% treasuries/fixed income forever, as long at the 10yr stays above 3%.

    I’m 60 now and have 7m and plan to withdrawal 200k a year. Empower says 99% success rate and dying at 90 with about the same asset balance. To me that is 100% success since I don’t really care about dying with a bunch of money – 1M or 2 to each kid fine.

    Easiest thing to do is use empower and find your retirement spending number you want, plug it in and see what they say.

    1. I like that I said allocation plan as a 60 year old person. Treasury bond rates at 5% plus it’s so nice. The need to more risk in Retirement is unwise at this risk-free rate.

      Is there anything you wish to spend more money on? And are you finding yourself having a difficult time and spending more money than average?

      1. Good questions. Day to day I don’t feel the need to spend more. We average spending 17,500 a month with no debt at all and just me and my wife leads to a very comfortable lifestyle. We aren’t into alot of luxury lifestyle so it can be actually a struggle to spend that much. After utilities and insurance (only real fixed costs), we have about 500$ a day to spend how we like. We eat out alot and don’t think twice about spending on hobbies like golf, expensive running shoes, etc. and still throw some $$$ to our grown kids here and there. And we travel alot – 3-4 international trips a year – about $15k per. With the 200k spending we are still saving 300k a year.

        I do struggle with the bigger ticket items. I have been looking at a new car to treat myself – right now the Audi A8, about $110k. Never had a new luxury car. Been trying to pull the trigger for about 3 years. Definitely can afford it but then I keep coming back to this website and you make me feel unwise to purchase it….LOLLL

        1. Haha nice. Well, if you are still able to save $300,000 a year after spending almost $200,000 a year and have no debt, I said, go for it and buy whatever nice car and nice things you want!

          I am actually never regret buying something really nice that I use frequently, such as a car, shoes, glasses, homes, etc.

          You can even buy 50 copies of Buy This Not That and gift to friends and family. What a great idea!


  4. Dear Sam, I see a flaw in your DSWR matrix. Investors worry about the state of the ‘Market’ as much or more so on a day to day basis than they worry about the overall‘Economy’. High 10 year treasury yields can mean that inflation is high and/or the U S Treasury may be having difficulty selling enough bonds at auction. The stock and bond markets would likely tank under such a scenario leading a prudent retiree to preserve capital by taking much smaller withdrawals than your matrix recommends. More generous distributions can resume once the financial storm has passed.

      1. I think that a 4% withdrawal rate is reasonable under ‘normal’ market conditions such as we have now. When valuations drop it would make sense to reduce your rate to the 2 to 3 percent range until markets recover. I am semi-retired and my wife is still working so we haven’t established a systematic withdrawal regimen yet. Please look me up if you ever find yourself in Jackson Hole, WY and thanks for all of your solid financial and lifestyle advice over the years!

  5. Colorado Craig

    The one thing in life that is certain…nothing is for certain. What I have found that worked for me was a focus more on generating diverse income streams and portfolio growth than a withdraw rate. My portfolio has changed with time based on my age, risk tolerance, retirement horizon and income needs. Over time I have converted from a 100% stock(to grow the portfolio), to Stock/Bonds to Stocks/Bonds/Private Equity. The older I get the more asset class diversification in the portfolio with a move towards adding more income generating investments. So right now use part time work income/dividend/interest/lending/real estate to meet my needs and continue to have growth in the portfolio. Starting to wind down my “fake retirement” and will look adjust the portfolio. Social Security will be the next income stream added. A focus on tax efficiency with a portfolio that generates income based on where I am in life. I personally found it was best to stay away from things like withdraw rates, 60/40 bond allocation the idea to set a strategy an leave it. I keep changing the portfolio diversification and investments based on where I am in life.

    1. I agree that uncertainty is certain.

      “ So right now use part time work income/dividend/interest/lending/real estate to meet my needs and continue to have growth in the portfolio. ”

      Does that mean you’re not retired? Because if you’re not retired, it’s much easier to take on more risk. It’s once you depend on the vast majority of your investments to survive that you become much more conservative. And every single incremental supplemental dollar you make in retirement feels great.

      1. Colorado Craig

        The three things that I found most difficult when I stopped my day job…
        1. Not getting a paycheck
        2. Going from 30 + years of accumulation to deaccumulation of the portfolio
        3. Finding something meaningful to do
        I really like your term “fake retirement”. For me it was the glide path to real retirement. So I earned income not as much as before. Once I got the passive income streams set up I saw what the portfolio can really do I felt much better about spending money. I spent all the money I made on fun activities and things I have put off.. Instead of looking at that really nice 8 weight fly rod for a year I bought it. Took a couple of trips. I was also able to take up activities to the point I don’t miss the work aspect. I found retirement needed both a financial and mental well being plan.. I had the financial plan been working on it a long time but no plan for the all mental aspects of retirement. I fell into “fake retirement” which bridged me to full retirement mentally. So no real change to the risk profile just a change in attitude!

  6. Hey Sam,
    At first blush, this seems to make sense at least directionally. But then –
    1) it should depend on the stock/bond ratio of your portfolio since stocks generally do worse when rates are high (cet par)
    2) it may be linear over a mid range of rates but it can’t be a simple direct proportional relationship since for practical purposes (other than the very wealthy) the withdrawal rate will never be less than say 2%. And then at very high rates, see #1.
    3) as a practical matter, I find that much of my budget is non-discretionary (taxes, insurance, utilities, repairs, medical, basic food) so while my spending may be at a 4% withdrawal rate, there’s no way I can reduce it below around 2.5%.
    Keep up the thought provoking work!!

    1. Regarding 3) – Yeah, I guess it depends on how big your investment income is. If you’re running quite lean already, then there’s not much wiggle room to raise or lower your withdrawal rate.

      Regarding 1) – Yes, your asset allocation mix will help determine your DSWR. But it works fine if you are 100% in stocks (S&P 500) or 100% in bonds (Treasuries) if you want to go to the extreme.

      Regarding 2) – Nothing is linear. It’s dynamic with ups and downs above and below a line.

  7. Hi Sam,
    I don’t understand this point, where you state: “If the economy does indeed slow down and inflation does settle down to the Fed’s long-term target of 2-2.5%, then the DSWR will also come down. As a result, you may naturally decide to spend more money in retirement.”

    If DSWR comes down, then spending would go down as well, right?


    1. Financial Samurai

      Ron, great catch. I meant to say “less money.” Now corrected.

      As a result, you may naturally decide to spend less money in retirement. You’re logically bracing for leaner times while inflation is no longer hurting your purchasing power as much.

  8. Dunningfreakingkruger

    DSWR is wise. Everyone should be flexible determining appropriate withdrawal levels in retirement.

    As Bruce Lee said, “be water my friend.”

  9. Taking a dynamic approach to retirement makes so much sense to me. As every year passes and I get older the more and more I recognize that nothing in life is static including markets, finances, and investments. As such, staying flexible and adopting to changing times is a logical and smart approach to retirement withdrawals. Thanks for explaining things so clearly!

  10. Thanks Sam! I really appreciate the way you make this stuff understandable.

    And you’re spot on about bidets – what a game changer!

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